Gold and gold miners have lifted to seven-week highs, underpinned by a Federal Reserve put on hold by mixed economic data as well as geopolitical catalysts that have attracted incremental fear bids. The rallies have occurred without much fanfare because neither futures nor equities have set off long-term buy signals that predict much higher prices. However, it is time to get these instruments onto watch lists because breakouts could catch the complacent crowd by surprise.

The precious metals group is trading close to price levels in place at the time of the presidential election. Precious metals were sold aggressively after Donald Trump won because it was assumed that higher growth rates would signal higher inflation and a long period of Fed rate hikes. Neither of those outcomes has unfolded so far in 2017, allowing these instruments to claw back their losses and shift into neutral mode. (See also: ETFs: Trump Prompts Flood to Precious Metal ETFs.)

Weekly ranges have been contracting for the past seven months, while trading volume has fallen, with the precious metals crowd forced to shift its attention to more active markets. However, a steady trend higher or lower could replace quiet price action in coming months, offering unexpected opportunities. A wait-and-watch strategy makes more sense in this bilateral scenario rather than jumping in with both fists because these fickle markets often fool the majority. (For more, check out: The Industry Handbook: Precious Metals.)

GLD Weekly Chart (2011 – 2017)

 

The SPDR Gold Trust (GLD) topped out at $186 in 2011 and entered a severe downtrend that continued into the December 2015 low at $100. It bounced strongly into the second half of 2016, stalling at the .386 Fibonacci sell-off retracement level above $130 in June 2016. A decline into December found support at the .786 rally retracement level, giving way to a bounce that stalled just above the midpoint of the sell swing in March 2017.

The fund has been crisscrossing the 200-day exponential moving average (EMA) since that time, carving a narrow range pattern between $114 and $123, while on-balance volume (OBV) holds near 2017 highs. The Oct. 4 gap between $125 and $123 looks like the critical price zone in this setup because that price bar broke the top in place after the 2016 recovery rally. In turn, a buying surge above $125 should set off a reliable buying signal ahead of a trend advance that tests last year's high. (See also: Gold, Silver and Oil Heading Into Resistance.)

GDX Weekly Chart (2011 – 2017)

 

The Vaneck Vectors Gold Miners ETF (GDX) topped out with the futures contract in 2011 and fell to the lowest low in the fund's history in January 2016. The subsequent recovery wave ended the five-year string of lower lows in place when it reached the August 2013 swing high at $31.35 in August 2016. That also signaled the rally's end, ahead of a proportional pullback that found support in the upper teens in December.

A vertical bounce into February 2017 stalled at the 50% sell-off retracement level at $25, with that horizontal barrier still in place six months later. Contracting highs and lows since that time have carved the outline of a descending triangle pattern across the 200-day EMA, with trendline resistance near $23.50 highlighting a narrowly defined breakout level while support at $21 needs to hold in order to avoid a steeper slide. (For more, see: GDX: Market Vectors Gold Miners ETF.)

It makes sense to focus on this instrument rather than the gold fund because buying and selling levels are easier to visualize. Specifically, a breakout will target the 2016 top, offering the potential of a seven- or eight-point advance, while a breakdown opens the door to the December low at $18.58, which is unlikely to end selling pressure. Bulls hold the short-term advantage because the fund is now trading within a point of trendline resistance.

The Bottom Line

The gold miners fund has carved a better organized price pattern than the gold fund in recent months and is now testing an intermediate breakout level. However, a failure by bulls to lift the instrument above $24 could backfire, opening the door to a triangle support test that yields a sizable breakdown into the year's end. (For additional reading, check out: Top 4 Gold Stocks as of July 2017.)

<Disclosure: The author held no positions in the aforementioned securities at the time of publication.>

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